Payment banks: Why enterprise and valuations will leave small players nursing their wounds

RBI Governor Rajan thinks many of these banks may not survive, as with the first round of bank licences in the 1990s where many players had failed.Pratik Bhakta&Arka Bhattacharya | ET Bureau | Updated: September 23, 2015, 11:42 IST

The differentiated banks hold out hope for millions who have remained isolated from financial services for years, and open up business opportunities.Anyone wondering what the 11 payments banks and 10 small banks will do, need not go far. All one has to do is read what the chairman of the biggest lender, State Bank of India, and the Reserve Bank of India governor had to say on them.

"Do you think the Indian banking system has matured enough to take on the onslaught from payment banks? Does the RBI see this as a first step towards some of the payments banks evolving into universal banks?" is what SBI chairman Arundhati Bhattacharya asked the RBI governor the day after payments banks licences were given out.

On what is in store, governor Rajan had this to say, "The (RBI) board took the view that it was hard to forecast what would happen in the payment space." He added, "Given the fact that we did not know what could succeed, the board chose to license a variety of players - some tech companies, finance companies, some bank-mobile combines. Now, let’s see how the game develops."

While Bhattacharya’s question reflects the potential threat from these nimbler financial companies, Governor Rajan’s view shows that many of them may not survive - as with the first round of bank licences in the 1990s where many players failed and were merged with their bigger counterparts.

The differentiated banks hold out hope for millions who have remained isolated from financial services for years, and open up business opportunities.

"We believe e-payments will help to soften lending rates and support growth over time," say Bank of America Merrill Lynch analysts led by Sachin Salgaonkar. "The spread of rural banking after the bank nationalisation of 1969 helped to shift rural India to cash-based transactions from barter. This led to a fall in the currency held by the public and a corresponding rise in bank deposits. E-payments will cut shoe leather costs of going to the bank, reduce cash holding, push up deposit growth and help pull down lending rates."

India’s payments market is at Rs 15.5 lakh crore in fiscal 2015 and is likely to grow 12 per cent annually. The share of mobiles — at less than 0.1% - may rise to 10% in seven years; with the value of mobile banking rising 200 times to $3.5 trillion, says Merrill.

The fact that branch banking is on the decline and Internet penetration is gaining, should sound sweet to the ears of the bank licence winners. Branch-based transactions have gone down by 7% and the number of transactions per ATM are slowing down, says BCG, a consultant.

Furthermore, the expansion of Internet services could make digital banking soar. Digital banking customers may reach 230 million by 2020; they could touch 300 million with payments banks in operation, it says. It is this potential to make big bucks that has left some of the more than 50 applicants who did not make the cut, sulking. Although RBI depended on external committees to choose, some say the process has been inconsistent.

"The list of names who were given payments bank licences indicate the RBI was looking at mostly people with deep pockets who could invest loads of cash and undertake heavy investment," says Ketan Doshi, MD, Pay Point India Network.

"Corporates who were not even in the payments space have been given licences which indicate that deep pockets were the more important criterion for RBI."

The RBI has made financial inclusion the cornerstone of its new bank licensing policy. It had provided a full-fledged bank licence to micro finance company Bandhan, while it ignored SKS Microfinance for even a small bank licence.

In fact, its licensing of the Reliance Industries and State Bank of India joint venture, and Sun Pharmaceuticals founder Dilip Shanghvi, has surprised many as the first doesn’t need a special licence while the second does not have any banking experience.

"We are disappointed because out of 10, eight are MFIs," said PH Ravikumar, non-executive chairman of SKS Microfinance - one of the only listed MFIs. Similar was the disappointment at many companies which have been growing in technology, but do not have big backers like Alibaba.

"If you look at the list you can see that they have given licences to two people - the first are the financially super strong and the second, somebody who has a place of default in the banking ecosystem," says B Amrish Rau, MD, Citrus Payment Solutions. "There is a Dilip Sanghvi, who has nothing to do with payments but has deep pockets and there is a Vijay Shekhar, who has become a possible point of default in the banking ecosystem and has Rs 110 crore of public money. RBI did not give payment bank licences on the basis of technology, it has got nothing to do with technology."

The RBI has said though, that it intends to move to an ‘on tap’ licensing regime, opening up the possibility for those who missed the bus this time to hop on whenever the regulator resumes. And for some, continuation as a non-banking finance company, or just a wallet services provider, may even be a blessing in disguise.

"Now that we have not got the licence we can roll out our financial services products in the way we want to," says Doshi of Pay Point. "We could not have entered the credit business if we would have become a payments bank. But now we can give credit, loans and investment products by tying up with few banks and NBFCs. "We do get much more freedom to operate now that we do not have to follow the strict guidelines of payments banks."

Part of the race to be among the payments bank or a small bank system is the potential market valuation that some of these companies receive.

Internationally, Alibaba, a company with dominant market share in the Chinese payments system, created a record with a $25-billion IPO this year. Although its stock has slid since peaking at $120 a share, Indian startups such as Paytm, one of the companies with a payments bank licence, is valued at $2.3 billion.

"We do not expect to see an Alipay equivalent behemoth wallet company in India as RBI rules would not allow an arbitrage opportunity for mobile wallets to gain at the expense of banks," Bank of America Merrill Lynch’s Rajeev Varma says in a report. "On the contrary, we think that restrictor KYC norms may limit the money stored in a wallet by consumers."

With a huge war chest and private equity investors chasing the next Alibaba, companies are on the move.

"There are Alibaba teams working with us to get the correct piece of technology, correct piece of product in place," says Vijay Shekhar Sharma, founder of Paytm, backed by Alibaba. "Alibaba is the energy that is infused within us, the energy that is allowing us to continue to dominate the marketplace. It is not just money, the capability of the system. Paytm is being powered in the marketplace, every nook and corner by Alibaba."

For the moment, it is the enterprise that’s powering businesses, and investors are queueing up for a share of the pie. The human instinct of greed and fear are at play and as governor Rajan admitted, it is anybody’s guess on what would be left in this battlefield once the dust settles.